Ratings agencies downgrade China Evergrande as concerns over junk bonds rise

Major credit ratings agencies this week downgraded China’s most indebted property developer Evergrande, as concerns over Asia’s junk bond sector rise. 

Fitch Ratings on Wednesday downgraded China Evergrande one notch from B to CCC, saying that the negative developments surrounding Evergrande may weaken investor confidence, further pressuring its liquidity. 

A rating of CCC means there’s a “real possibility” of a default, from the previous B rating — which means there is material default risk, but a limited margin of safety remains.

S&P Global Ratings on Monday took the property developer down two notches, from B+ to B-, citing its inability to reduce debt “in an orderly manner.” It added that the firm’s credit rating was dragged down by what S&P believed to be a “severe” decline in profitability at the firm.

China Evergrande has been struggling with liquidity issues since last year. However, last week’s news of an asset freeze refocused attention on the company’s debt troubles. That brought its share price down to a four-year low. Year-to-date, Evergrande’s share price has tumbled more than 60%.

Tech is a smaller part of the credit markets in Asia. One of the key sectors that has gotten impacted in the credit markets is actually real estate.

Neeraj Seth

head of Asian credit, BlackRock

While China’s technology crackdown has triggered shockwaves through stock markets this week, it’s actually real estate that’s sparking concerns in Asia’s credit markets, BlackRock told CNBC on Thursday.

“Tech is a smaller part of the credit markets in Asia,” Neeraj Seth, head of Asian credit at BlackRock told CNBC’s “Squawk Box Asia.” “One of the key sectors that has gotten impacted in the credit markets is actually real estate.”

Asian bond markets have underperformed in the last few months, compared to those markets in the U.S. and Europe, he said. 

In fact, Asian high-yield credit markets — also known as junk bonds — are in the middle of a correction, Seth pointed out.

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